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In re McKenzie

United States Court of Appeals, Sixth Circuit

May 24, 2013

In re: Steve A. McKenzie, Debtor.
Richard L. Banks, Andrew B. Morgan, and Richard Banks & Assoc., P.C. (12-5874); Steve A. McKenzie and C. Kenneth Still (12-5874 & 12-5875); F. Scott LeRoy, d/b/a LeRoy & Bickerstaff, LeRoy & Bickerstaff, PLLC, and LeRoy, Hurst & Bickerstaff, PLLC, (12-5874 & 12-5876), Appellees. Grant, Konvalinka & Harrison, PC, Appellant,

Argued: May 2, 2013

Appeal from the United States District Court for the Eastern District of Tennessee of Chattanooga. Nos. 1:11-cv-00258; 1:11-cv-00320; 1:11-cv-00346. Curtis L. Collier, Chief District Judge.



John P. Konvalinka, GRANT, KONVALINKA & HARRISON, P.C., Chattanooga, Tennessee, for Appellant.

Jerrold D. Farinash, KENNEDY, KOONTZ & FARINASH, Chattanooga, Tennessee, for Still Appellees in 12-5874 and 12-5875. Clinton P. Sanko, BAKER DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC, Chattanooga, Tennessee, for LeRoy Appellees in 12-5874 and 12-5876.


John P. Konvalinka, Harry R. Cash, GRANT, KONVALINKA & HARRISON, P.C., Chattanooga, Tennessee, for Appellant.

Jerrold D. Farinash, Andrea Hayduk, KENNEDY, KOONTZ & FARINASH, Chattanooga, Tennessee, for Still Appellees in 12-5874 and 12-5875. Clinton P. Sanko, Joshua A. Powers, BAKER DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC, Chattanooga, Tennessee, for LeRoy Appellees in 12-5874 and 12-5876. M. Andrew Pippenger, LEITNER, WILLIAMS, DOOLEY & NAPOLITAN PLLC, Chattanooga, Tennessee, for Banks Appellees in 12-5874.

Before: MARTIN, GUY, and McKEAGUE, Circuit Judges.


RALPH B. GUY, JR., Circuit Judge.

Grant, Konvalinka & Harrison, P.C, (GKH) appeals from the district court's order affirming the bankruptcy court's decisions dismissing the two complaints it filed in bankruptcy court, and denying it leave to file a third complaint in state court, each of which alleged malicious prosecution and abuse of process against Bankruptcy Trustee C. Kenneth Still, individually, and the attorneys who represented him. See In re McKenzie, 476 B.R. 515 (E.D. Tenn. 2012). GKH, a law firm representing itself here and in all the proceedings, alleged that the Trustee and his attorneys filed and pursued three separate actions against GKH on behalf of the bankruptcy estate of the Debtor Steve "Toby" McKenzie that were meritless, without foundation, and brought for purposes of annoyance or harassment.[1]

GKH insists that the bankruptcy court erred in dismissing GKH's two adversary complaints on grounds of quasi-judicial immunity and/or failure to state a claim upon which relief may be granted. See Grant, Konvalinka & Harrison, PC (GKH) v. Banks et al (In re McKenzie), No. 11-ap-1016, 2011 WL 3585622 (Bankr.E.D.Tenn. Aug 12, 2011); GKH v. F. Scott LeRoy, d/b/a LeRoy & Bickerstaff, et al. (In re McKenzie), No. 11-ap-1110, 2011 WL 4600407 (Bankr.E.D.Tenn. Sept. 30, 2011). GKH also contends that the bankruptcy court abused its discretion in denying GKH's motions for leave to file its third complaint in state court, and to alter, amend, or set aside that order. See In re McKenzie, No. 08-16378, 2011 WL 3439081 (Bankr.E.D.Tenn. Aug. 5, 2011); In re McKenzie, No. 08-16378, 2011 WL 4481234 (Bankr.E.D.Tenn. Sept. 27, 2011). For the reasons that follow, we affirm.[2]


The bankruptcy case began as an involuntary petition brought by a group of McKenzie's creditors on November 20, 2008, and was consolidated with the voluntary Chapter 11 petition filed by McKenzie on December 20, 2008. C. Kenneth Still was appointed Chapter 11 Trustee on February 20, 2009, and continued as trustee after the case was converted to a Chapter 7 proceeding on June 14, 2010 (although a notice of the appointment was not filed by the United States Trustee until December 27, 2012). The Trustee, through counsel appointed by the bankruptcy court, brought three actions against GKH over a two-week period in late July and early August 2010.

After the last of those three actions was resolved in early 2011, GKH began pursuing its own claims against the Trustee and his attorneys culminating in the appeals at issue here. GKH unsuccessfully sought leave to file each of its complaints against the Trustee and his attorneys in state court, but has only appealed from the denial of leave with respect to the third complaint. Without repeating the procedural background and related proceedings fully detailed in the bankruptcy court's orders, a brief summary is necessary to the discussion of the issues before us.[3]

On July 23, 2010, the Trustee filed an adversary proceeding in bankruptcy court against GKH, only, seeking the turnover of documents and records alleged to constitute property of the estate pursuant to 11 U.S.C. § 542. That complaint, referred to here as the Turnover Action, alleged that GKH was the primary law firm representing McKenzie and sought records pertaining to more than 50 entities in which McKenzie allegedly had an interest. GKH expressed willingness to make some records available for inspection and copying, but also resisted demands for turnover of records pertaining to entities in which the Debtor was alleged to have only a partial interest. After a pretrial hearing held October 28, 2010, the Trustee and GKH entered into an agreed protective order and stipulated to dismissal of the Turnover Action without prejudice. The dismissal followed on November 5, 2010.

The Trustee's other two actions, filed on August 5, and 6, 2010, both arose from the same post-petition transfer of a 50-acre parcel of land from the Cleveland Auto Mall LLC (CAM) (an entity in which McKenzie had a 50% interest) to a newly formed entity called Exit 20 Auto Mall LLC (Exit 20) (an entity in which McKenzie had no interest). The "50-Acre Transfer" occurred on December 10, 2008—between the filing of the involuntary and voluntary petitions in bankruptcy—and stripped CAM's only remaining significant asset. It was alleged that McKenzie conveyed his interest in the property while his cognitive abilities were impaired by a serious medical condition. What actually happened is not clear from the record, but it is also not material to the issues on appeal.[4]

Specifically, the Trustee filed the Avoidance Action as an adversary proceeding in bankruptcy court, alleging a violation of the automatic stay (11 U.S.C. § 362(k)); seeking avoidance on the grounds of preferential and/or fraudulent transfer (11 U.S.C. §§ 547(b) and 544(g)); and making claims for equitable subordination and against insiders with respect to the 50-Acre Transfer (11 U.S.C. § 510(c)). Attached to the complaint was the warranty deed dated December 10, 2008, signed by McKenzie as managing member of CAM, which stated that it had been prepared by and was to be returned to GKH. An affidavit signed by Bowers represented the value of the property to be $4 million.

GKH and the other defendants successfully moved to dismiss the Trustee's Avoidance Action. Bankruptcy Court Judge John Cook found that, despite the dubious circumstances allegedly surrounding the transfer, the Trustee could not establish any of his claims because he failed to allege a transfer of property of the estate, property of the debtor, or an interest in property of the debtor. Judge Cook explained that, under Tennessee law and notwithstanding the prior administrative dissolution of CAM, CAM continued to exist as a separate legal entity such that the 50-acre parcel remained the separate property of CAM. Therefore, although the Debtor's interest in CAM became part of the bankruptcy estate, the real property owned by CAM did not. This distinction is at the heart of GKH's claims of malicious prosecution and abuse of process by the Trustee. Defendants' motions to dismiss were granted on December 16, 2010, and no appeal was filed. The Trustee subsequently filed a motion for relief from judgment under Fed.R.Civ.P. 60(b) (incorporated by Fed.R.Bankr.P. 9024), which was denied.[5]

Finally, the third complaint filed in the Chancery Court for Bradley County, Tennessee, by the Trustee, together with the Debtor, asserted "non-core" claims of breach of fiduciary duty, assisting the breach of fiduciary duty, and civil conspiracy to commit fraud in connection with McKenzie's transfer of the 50-acre parcel (Bradley County Complaint). GKH was alleged to have represented McKenzie under a conflict of interest and to have drafted the documents involved in the 50-Acre Transfer. The defendants' filed several motions to dismiss, relying on the one-year statute of limitations for some claims; denying that Bowers owed McKenzie any fiduciary duty; and arguing that there could be no conspiracy because there was no violation of the stay, or any fraudulent transfer, fraudulent misrepresentation, or fraudulent concealment. The defendants also argued that dismissal of the Avoidance Action on December 16, 2010, should bar this action as well. Several of the Trustee's claims were dismissed on statute of limitations grounds in January 2011, and a stipulated order stating that the dismissal was final as to all defendants and all counts was entered in March 2011. No appeal was filed.

GKH then brought three actions of its own against the Trustee and his attorneys alleging malicious prosecution and abuse of process for having initiated and pursued each of the three lawsuits against GKH. GKH requested leave to file those suits in state court under the common law Barton doctrine, which limits jurisdiction over certain claims to bankruptcy court. See Allard v. Weitzman (In re Delorean Motor Co.), 991 F.2d 1236, 1240 (6th Cir. 1993) (discussing Barton v. Barbour, 104 U.S. 126, 127 (1881)).

The district court consolidated the appeals from four detailed orders entered in GKH's three actions during August and September 2011. In those four orders, Bankruptcy Court Judge Shelley Rucker: (1) dismissed GKH's adversary proceeding alleging claims related to the Avoidance Action as barred by quasi-judicial immunity; (2) dismissed GKH's adversary proceeding alleging claims based on the Turnover Action on alternative grounds of quasi-judicial immunity and failure to state a claim; (3) denied GKH's motion for leave to file its third complaint in state court asserting claims based on the Bradley County Complaint; and (4) denied GKH's motion to alter, amend, or set aside that order to account for GKH's later determination that the Debtor should be included as an "indispensable party." The district court affirmed the bankruptcy court's decisions in all respects, and these appeals followed.


On appeal following the district court's review of the bankruptcy court's decisions, we review the bankruptcy court's orders directly rather than the intermediate decision of the district court. Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 314, 319 (6th Cir. 2006). We review the legal conclusions de novo and any factual findings for clear error. Id.; Heavrin v. J. Baxter Schilling (In re Triple S Restaurants, Inc.), 519 F.3d 575, 578 (6th Cir. 2008). To the extent that GKH has argued error by the district court, we construe the arguments as challenging the bankruptcy court's decisions directly.

Before turning to those arguments, however, it is important to note that GKH's appeals, both in the district court and here, have not challenged the bankruptcy court's application of the same standards to the Trustee and his attorneys. "[A]s a matter of law, counsel for trustee, court appointed officers who represent the estate, are the functional equivalent of a trustee, [when] they act at the direction of the trustee and for the purpose of administering the estate or protecting its assets." Allard, 991 F.2d at 1241; see also Lowenbraun, 453 F.3d at 321; Benton v. Cory, No. 10:-cv-00907, 2010 WL 5056018. at *5-6 (D. Nev. Dec. 3, 2010), aff'd 474 F.App'x 622 (9th Cir. 2012), cert. denied, 133 S.Ct. 1637 (2013). Any argument to the contrary is considered waived because it was not raised in the district court or on appeal to this court. See City of Columbus v., L.P., 693 F.3d 642, 652 (6th Cir. 2012).


We review the bankruptcy court's decisions granting the defendants' motions to dismiss de novo, and apply the same standards whether the motion sought dismissal under Fed.R.Civ.P. 12(b)(6), or judgment on the pleadings under Fed.R.Civ.P. 12(c) (both incorporated by Fed.R.Bankr.P. 7012(b)). See Roth v. Guzman, 650 F.3d 603, 605 (6th Cir. 2011); Kottmyer v. Maas, 436 F.3d 684, 689 (6th Cir. 2006). To survive a motion to dismiss, the complaint must "contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A motion to dismiss may be granted on the basis of an affirmative defense if the facts conclusively establish the defense as a matter of law. Hensley Mfg. v. ProPride, Inc., 579 F.3d 603, 613 (6th Cir. 2009). Despite GKH's arguments to the contrary, we find no error in the bankruptcy court's determination that the claims of malicious prosecution and abuse of process in connection with the Trustee's Avoidance and Turnover Actions were barred by quasi-judicial immunity. As such, we need not consider the alternative grounds for dismissal on the merits.

A. Quasi-Judicial Immunity

Judges enjoy absolute immunity from suit for money damages for actions taken in their judicial capacity, except when taken in the complete absence of jurisdiction. Bush v. Rauch, 38 F.3d 842, 847 (6th Cir. 1994). Extension of such immunity to officials performing quasi-judicial duties has been recognized for "those persons performing tasks so integral or intertwined with the judicial process that these persons are considered an arm of the judicial officer who is immune." Id. (extending immunity to probate court administrator). This determination is made using a "functional" approach, under which courts look to the nature of the function being performed rather than the identity of the actor performing it. Id.; see also Forrester v. White, 484 U.S. 219, 229 (1988). Also considered is "the effect that exposure to particular forms of liability would likely have on the appropriate exercise of those functions." Forrester, 484 U.S. at 224. Bankruptcy trustees serve in a variety of functions and may be immune for some but not all of those functions. Weissman v. Hassett, 47 B.R. 462, 466 (S.D.N.Y. 1985).

Case law governing personal liability for trustees has been described by several courts as confusing and sometimes contradictory. See, e.g., Kirk v. Hendon (In re Heinsohn), 231 B.R. 48, 64 (Bankr.E.D.Tenn. 1999), aff'd 247 B.R. 237 (E.D. Tenn. 2000); Schechter v. State of Ill. (In re Markos Gurnee P'ship), 182 B.R. 211, 215 (Bankr. N.D.Ill. 1995), aff'd 195 B.R. 380 (N.D. Ill. 1996). A considered attempt to sort out the law is found in the bankruptcy court's decision in Heinsohn, which was relied upon by the bankruptcy court here. See also In re Cutright, No. 08-70160-SCS, 2012 WL 1945703, at *12-13 (Bankr. E.D. Va. May 30, 2012) (distinguishing between beneficiary claims for breach of fiduciary duty and non-beneficiary claims that may be barred by quasi-judicial immunity).

It is generally accepted, albeit under varying rationales, that quasi-judicial immunity does not extend to claims against a trustee by beneficiaries of the estate for breach of fiduciary duty. See In re Heinsohn, 231 B.R. at 65; Schechter, 182 B.R. at 218-19. Although there is disagreement among the circuits concerning the applicable standard of proof, this court has held that: "A bankruptcy trustee is liable personally only for acts willfully and deliberately in violation of his fiduciary duties." Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 462 (6th Cir. 1982); see also In re Heinsohn, 231 B.R. at 65 n.10 (describing split over whether trustee may incur personal liability for negligent or only willful breach of fiduciary duty). Here, GKH did not allege claims for breach of fiduciary duty by the Trustee or his attorneys.

Further, as GKH concedes, a bankruptcy trustee is ordinarily entitled to quasi-judicial (or derivative) immunity from suit by third parties for actions taken in his official capacity. See, e.g., Kashani v. Fulton (In re Kashani), 190 B.R. 875, 883 (BAP 9th Cir. 1995); Schechter, 182 B.R. at 216-17; Weissman, 47 B.R. at 466 ("trustees and receivers acting as officers of the court to conserve the bankrupt estate's assets are immune from suit"). For example, in Heinsohn, the district court affirmed the determination that the trustee was entitled to quasi-judicial immunity from suit for malicious prosecution in connection with having reported possible criminal violations discovered in the course of the bankruptcy proceedings. Also, this court concluded in Lowenbraun that counsel for the trustee was entitled to absolute immunity with respect to state law claims brought by the non-debtor wife arising out of a contempt motion filed against her in bankruptcy court. 453 F.3d 322-23. We emphasized that the defendant's "role as counsel for the trustee permitted him to investigate [the non-debtor wife's] transfer and to recover assets properly belonging to the bankruptcy estate." Id. at 323.

Here, GKH urges us to find that quasi-judicial immunity did not apply to bar its claims because (1) the Trustee's actions were ultra vires (or outside the scope of his authority); and (2) the Trustee acted without prior bankruptcy court approval. These are the same arguments that were made to and rejected by the bankruptcy court. S ...

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